Post IPO, Analysts Differ On Facebook Ad Prospects

With the 40-day quiet period after Facebook’s IPO ended, the first wave of Wall Street analyst reports arrived Wednesday, weighing in on the company’s prospects following its rocky
market debut in May.

As reported in The
Wall Street Journal today, many analysts are taking a wait-and-see approach to Facebook, initiating coverage with neutral ratings over concerns about monetization. Facebook’s stratospheric
valuation at launch also dampened enthusiasm for the stock, with even the most bullish analysts projecting it will take another year before the company gets back to its IPO price of $38 a share.

Much of Facebook’s future growth will hinge on its ad business, which accounted for 80% of its revenue in 2011. The initial research report from Citigroup analyst Mark Mahaney, who rated
Facebook as a “hold,” highlighted some of the challenges the company faces in maximizing its potential as an advertising platform.

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On the plus side, the report noted that 85% of
marketers use Facebook as a marketing tool, based on a survey of some 800 advertisers it conducted with Ad Age. Furthermore, more than half (56%) expect their Facebook budgets to increase
over the next year, with 39% saying spending will be about the same.

But while Facebook is now an “experimental buy” for major brand advertisers, they have yet to make full budget
commitments to the social network. Why? “Limited creative options, less-than-robust tracking and data analytics tools, and a somewhat uncooperative attitude were cited as negative factors by the
advertisers we spoke with,” stated the Citigroup report.

Mahaney also noted it was somewhat surprising that big endemic advertisers like Amazon, eBay, Priceline and Expedia aren’t
spending much on Facebook, either. “The fact that these highly sophisticated Online Advertisers aren’t committed to the Facebook platform should give potential investors in FB
pause,” he wrote.

Their reluctance stemmed, in part, from uncertainty about return on investment of Facebook advertising, with 38% describing it as inferior to that of platforms such as
Yahoo and Google.

In the months leading up to its IPO in particular, Facebook has been more aggressive in rolling out new ad offerings to attract spending and bolster revenue growth. The
majority of marketers (58%) said they were happy with the company’s array of products and services, but a significant minority—42%--were not. Along with introducing more ad options,
Mahaney suggested Facebook should also beef up its national sales force and advertising teams.

The most publicized shortcoming of Facebook’s ad strategy to date has been its lack of
mobile monetization until recently. Early data from Facebook ad partners suggests sponsored stories in mobile are delivering higher click-through rates than on the desktop at lower rates.

The
lower eCPMs in mobile may be welcome to advertisers but not necessarily Facebook’s bottom line. Even so, some analysts see significant upside to Facebook’s mobile ad efforts. Doug Anmuth,
an analyst at JP Morgan, one of the lead underwriter’s of Facebook’s IPO, projects mobile could bring in $300 million to $500 million in the next two to four quarters “as higher
pricing and visit frequency offset fewer overall impressions.” Anmuth has a “buy” rating on Facebook.

Citigroup’s Mahaney, by contrast, projects mobile advertising
won’t even be material until 2014.